Geography, Competition, and Optimal Multilateral Trade Policy

40 Pages Posted: 18 Mar 2019

See all articles by Antonella Nocco

Antonella Nocco

Università del Salento (Lecce) Dipartimento di Scienze Economiche e Matematico-Statistiche

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation

Matteo Salto

Directorate-General COMP, European Commission

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Date Written: March 2019

Abstract

How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use `disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.

Keywords: Firm Heterogeneity, International trade policy, monopolistic competition, multilateralism, Pricing to market

JEL Classification: D4, D6, F1, L0, L1

Suggested Citation

Nocco, Antonella and Ottaviano, Gianmarco I.P. and Salto, Matteo, Geography, Competition, and Optimal Multilateral Trade Policy (March 2019). CEPR Discussion Paper No. DP13584. Available at SSRN: https://ssrn.com/abstract=3354450

Antonella Nocco (Contact Author)

Università del Salento (Lecce) Dipartimento di Scienze Economiche e Matematico-Statistiche ( email )

Piazza Tancredi, n7
Lecce, 73100
Italy

Gianmarco I.P. Ottaviano

Bocconi University - Department of Economics and Paolo Baffi Centre on Central Banking and Financial Regulation ( email )

Via Gobbi 5
Milan, 20136
Italy

Matteo Salto

Directorate-General COMP, European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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